9 Previous Economic Panics

In 1593 tulips were introduced to the Netherlands from Turkey. The novelty made it expensive. Later, tulips contracted a virus known as mosaic, which altered some causing “flames” of color to appear upon the petals. The color patterns increased the rarity of the bulb. Everyone began to deal in bulbs, and as in all speculative bubbles, the prices became an inaccurate reflection of the value. Prices rose so fast and high that some traded their land and life savings to get more bulbs. Many Dutch believed that they would sell their vegetables to foreigners with enormous profits. Slowly, prices became lower as everyone tried to sell while not many were buying. Dealers refused to honor contracts and people began to realize they traded their homes for a piece of flower. The government tried to halt the crash by offering to honor contracts at 10% of the value, but by then, the market had plunged even lower, making such restitution impossible. A terrible depression followed.

1720: South Sea Bubble Bust

With the British empire vastly expending, the South Sea Company purchased the “rights” to all trade in the South Seas, with a ten-million pounds IOU with the government. SSC had no problem attracting investors because stocks of other companies (like East India Trading Company) were difficult to buy. The popular conception was that a South Sea trade would open a lucrative South Americas. With demand vastly exceeding the supply of stocks, the company became a pyramid scheme.

Meanwhile in France, an exiled Brit, John Law founded the Mississippi Company, which specialized in exchanging gold and silver to a paper currency, and whose total stock came to worth 80 times more than all the gold and silver in France. Success of SSC and Mississippi Company fueled emergence of ludicrous ventures such as the ones that promised to reclaim sunshine from vegetables and to build floating mansions to extend Britain’s landmass-which were lampooned by Swift in his Gulliver’s Travels.

By 1720, the poor management team at SSC finally realized that the titular trading company is doing dismally. When the news leaked, the panic selling of worthless certificates of all companies ensued. The South Sea bubble bust also killed the Mississippi Company. A complete crash was avoided alone due to the timely intervention of the British government, which outlawed the issuing of stock certificates, a law that was not repealed until a century later.

1797: The Panic of 1797

Britain’s economy was hurt, as Britain was fighting France in the French Revolutionary Wars. To aid the ailing economy, the Bank of England introduced the deflationary measures in 1797. The deflation created a small panic in England, but it spread more intensively in real estate markets of the coastal United States and the Caribbean through the turn of the century. Many people in the New World were land-poor (i.e., they owned large plantations and lands but didn’t have enough hard money to pay off his creditors) and when faced with financial hardships, they absconded. Many American creditors including Senator Robert Morris the “financier of the revolution” (above) who once paid Washington’s troops from his own funds, ended up in the prison. The Panic of 1797 also changed American political landscape dramatically; Morris once contributed substantially to the Federalist cause, and his economic failure succumbed the Federalist party, and led to the election of Democratic-Republican Thomas Jefferson in 1800.

1873: The Long Depression

It was the depression termed “the Great Depression” before the actual leviathan came along in 1929. The Long Depression (1873-1896) affected the entire world, and caused the Great Britain to lost its large industrial lead over Continental Europe. Although its main cause is the shortage of available money to facilitate the global trade, the Long Depression was triggered by 1870 Franco-Prussian War and large reparations France owe to Germany. On May 9th 1873, the Vienna Stock Exchange collapsed with the dramatic fall of silver. In America, the unhealthy railroad boom, rampant since the end of Civil War, busted. Many nations fell back to protectionism, but 19th century tenets of classic liberalism (that it was not the government’s role to intervene in the economy) protracted the depression. Politically, the Long Depression revived a new wave of colonialism as the western powers sought new markets and new gold. Since this depression was caused by shortages of gold that undermined the gold standard, it was finally alleviated by Witwatersrand Gold Rush (1886) in South Africa and the Klondike (1898).

1926: Florida Real Estate Craze

In the gilded age of the 1920s, Americans believed that their prosperity would be infinite. Florida is a prime residence for people who don’t like the cold. The population was growing steadily and housing couldn’t match the demand, causing prices to double and triple. This increasing prices attracted speculators, and soon everyone in Florida became a real estate investor or a real estate agent. Land prices continued to increase until the moment when no one wanted to buy absurdly overpriced land. Then panic selling, and bust ensued.

1929: The Great Depression

After the end of the First World War, with the industrialization of many parts of the world, stocks always went up on the Wall Street. Many speculated on the Wall Street without understanding system, and still made profits. With the flood of uneducated investors, the market was ripe for some manipulation and swindling. Investment brokers traded substantial stocks amongst one another at progressively increasing prices. When the public noticed this manufactured increase of stock values, everyone bought the stock, creating profits for the manipulators who would then sell off their shares. The herd mentality on the trading floor continued pleasantly until 1929 when the boom-bust wheel came one full circle and the ignorant investors mass-panicked. The twelve-year worldwide depression followed and ended only with the coming of WWII.

1987: The Crash of 1987

The U.S. Securities and Exchange Commission was established by FDR to prevent further market crashes and fraudulent practices. However, the SEC couldn’t make the investors and public follow its advices. In the ’60s and ’70s, investors looked not at the value of the company but at the popularity of its marketed products. As it happened during 18th century South Sea Boom, many dubious ventures thrived unabated until the ’80s. But when in early 1987, the SEC started to investigate insider tradings, investors abandoned lucrative dubious and mostly crooked ventures. This minor panic is coupled with lagging of the-then primitive NYSE’s computer system. Not knowing the actual prices on the Wall Street, people panicked and started dumping stocks. The Dow lost 22.6% and 500 billion dollars in a day.

1997: The Asian Financial Crisis

Between 1955 and 1990, land prices in Japan increased by 70 times and stocks increased by 100 times. Trading became a national pastime. During the eighties, large Tokyo firms worthed more individually than all their American counterparts combined, and Japanese golf courses worthed more than all the stocks combined on the Australian exchange. Investors saw a potential bubble, but believed that high level of collusion between the government and businesses could sustain the growth forever. Indeed, when the Japanese government intervened by regulation and raising interest rates, the Nikkei index plummeted 30,000 points. The bursting of the Japan bubble made a huge tsunami of credit crunches and loss capital in South and East Asia. It crippled the American economy as well.

2000: Dot-Com Bubble Bust

Commercially the internet became the ‘new economy’ in 1995 with an estimated 18 million users. The age-old specter is resurrected again: companies again pursued risky ventures akin to the ones that crippled 18th century England and the 1980’s America. Investors wanted big plans instead of solid plan. Dotcom doublespeak, networking, new paradigm, information technologies, internet, consumer-driven navigation, tailored web experience, and many more, was created. Investors blindly purchased every new stock without even looking at the business plan. When many of these companies folded within months of their offering, the usual panic followed. The Nasdaq Composite lost 78% of its value. In 2001 the number of IPOs dwindled to 76 from 1999 numbers of 457 IPOs.